Department of Education Proposes Changes to Loan Program Rules

Rule changes proposed by the Department of Education not only address the high-profile issues surrounding the relationship between colleges and universities and lenders but also will impact management of Perkins loans. In many instances, ED has accepted guidance from the negotiated rulemaking team that failed to reach consensus this spring on the package of regulatory changes. But, with numerous other issues, ED is taking a position with which some negotiators disagreed. An internal departmental task force has been charged with drafting the proposed regulations.

All institutions that participate in any of the federal loan programs will be impacted by these rules. NACUBO urges its members to review the notice and submit comments to ED by the August 13 deadline. Please help inform NACUBO's comments to ED on this proposal by sharing your concerns and comments with Anne Gross (see contact information below).

Summary of Proposed Changes

Following is a roadmap to the proposed changes, organized by loan program. Page numbers refer to the points in the preamble to the proposed rules (in the PDF version of the June 12 Federal Register notice) at which discussion begins on the particular topic.

Multiple Programs

Simplification of Deferment Process (p. 32411): would allow lenders, including institutions for Perkins loans, to grant deferments based on information from other lenders that have determined students eligible.

Accurate and Complete Copy of a Death Certificate (p. 32412): would allow the use of a photocopy--in place of an original or certified copy--of a death certificate to document the discharge of a loan under the FFEL, Direct, or Perkins programs.

Total and Permanent Disability Discharge (p. 32413): would restructure the discharge regulations and procedures for individuals with total and permanent disabilities, including defining the date of disability as the date the physician certified the application form, and require that the application be submitted within 90 days of such certification.

NSLDS Reporting Requirements (p. 32414): would require institutions, lenders and guaranty agencies to report enrollment and loan status information to the National Student Loan Data System by a deadline (as yet unspecified) established by the secretary of education.

Certification of Electronic Signatures on Master Promissory Notes (p. 32415): would require institutions to create and maintain a certification regarding electronically signed MPNs and retain the certification for three years after all loans are satisfied.

Record Retention Requirements on MPNs Assigned to ED (p. 32416): would require institutions that make Perkins loans to retain records showing the date and amount of each disbursement made under an MPN. These disbursement records would have to be retained until the loan is repaid, canceled, or otherwise satisfied. For a Perkins loan that later is assigned to ED, disbursement records would have to be submitted upon request. Current rules require disbursement records to be retained for only three years. The proposal would impose similar requirements on lenders and guaranty agencies in the FFEL program.

Loan Counseling for Graduate or Professional Student PLUS Loan Borrowers (p. 32417): would require entrance and exit counseling for student borrowers under the PLUS loan program, and would require institutions to notify such borrowers of their eligibility for Stafford or Direct loans.

Maximum Loan Period (p. 32418): would eliminate the 12-month maximum loan period to better accommodate programs without standard terms and students who "stop-out" for a while.

Perkins Loan Program

Mandatory Assignment of Defaulted Perkins Loans (p. 32418): would allow ED to require institutions to assign certain defaulted loans to ED for collections. Under the proposal, a Perkins loan would be subject to mandatory assignment if the outstanding principal is $100 or more, the loan has been in default for seven or more years, and no payment has been received in the past year. This was a contentious issue in negotiated rulemaking sessions because, once a loan is assigned to ED, any funds recovered go to the Federal Treasury rather than the Perkins Loan program. ED maintains that $400 million in old (five years or more), defaulted loans are being held by colleges and universities. Institutions, however, want to protect their Perkins revolving loan fund (25 percent of which comes from institutional resources) and argue that many delinquent borrowers eventually repay their loans--even after years in default--when they become established in their careers and want to improve their credit ratings.

Reasonable Collection Costs (p. 32419): would cap the collection costs that can be passed on to borrowers. For a first collection effort, the borrower could be assessed no more than 30 percent of total principal, interest, and late charges. For a second effort, the limit would be 40 percent, and, in cases with litigation, 40 percent plus court costs.

Child or Family Service Cancellation (p. 32419): would codify guidance provided in a 2005 "Dear Colleague" letter, specifying that to qualify for loan cancellation the borrower must be a full-time employee of a child- or family-service agency and must provide services exclusively to low-income children.

Federal Family Education Loan (FFEL) Program

Prohibited Inducements (p. 32420): would expand on existing regulations and subregulatory guidance that prohibits lenders and guaranty agencies from providing benefits to borrowers, institutions, or "school-affiliated organizations" in exchange for FFEL loan applications, loan volume, or placement on a preferred lender list. Inducements are at the heart of the recent controversy surrounding student lending. The proposed rules enumerate prohibited benefits (e.g. prizes, additional financial aid funds, printing of college materials) and allowed activities (e.g. reduced origination fees or interest rates for borrowers, participation in financial literacy programs, assistance equivalent to that provided by ED to Direct Loan schools). Guaranty agencies would be allowed to do some things, such as provide training and conferences, that lenders cannot. One of the concerns raised during negotiated rulemaking was the range of business relationships between financial institutions and colleges and universities. ED proposes to include a "rebuttable presumption" in the regulations that would assume that a benefit provided by a lender to an institution was in exchange for loan applications, requiring the entities involved to provide evidence to the contrary.

Eligible Lender Trustees (p. 32424): would implement recent statutory changes that prohibit a lender from entering into new eligible lender trustee relationships with institutions after September 30, 2006.

Loan Discharge for False Certification as a Result of Identity Theft: (p. 32425): would allow a lender to provide a 120-day administrative forbearance while invesitigating a borrower's claim that he or she is a victim of identity theft.

Preferred Lender Lists (p. 32425): would introduce rules governing the use of preferred lender lists by institutions, requiring that such lists include at least three non-affiliated lenders, disclose the method and criteria used to select recommended lenders, and include a prominent statement that students are not required to choose a lender from the institution's list. An institution would be prohibited from including on its list any lender that offered, or had been solicited by the institution to offer, financial or other benefits to the institution in exchange for placement on the list. Institutions would be allowed to solicit better benefits for student borrowers. Many of these proposed requirements have a familiar ring, since they are similar to provisions included in several bills in Congress and in the code of conduct developed by the New York attorney general.